Square IPO Filing Shows Starbucks Deal Was a Bust

Square’s relationship with Starbucks will soon be no more after what once looked like the best deal going turned into a big money-loser.

Back in 2012, the mobile payments company inked a momentous deal with the coffee giant Starbucks. Starbucks would invest $25 million in the San Francisco-based startup, and its CEO Howard Schultz would join Square’s board. In return, Square would process credit and debit card payments for Starbucks. But the payments processing would just happen on the backend; Starbucks wouldn’t convert to Square’s card-swiping hardware.

Starbucks had previously used Bank of America Merchant Services to process its payments and said the deal with Square would save it money. Square, meanwhile, said it believed the deal with Starbucks would be “a valuable catalyst for building best-in-class enterprise infrastructure.” Little more than a year later, in October 2013, Schultz stepped down from Square’s board. In December 2014, Starbucks said it would stop accepting Square-based mobile payments from shoppers in its stores.

Based on Square’s filings, the company appears to have lost more than $56 million dollars on the deal, the difference between revenue earned and the cost of processing transactions for Starbucks over three years

So it’s kind of understandable that Square says its agreement with Starbucks won’t be renewed when it’s scheduled to expire in the third quarter of 2016—“at which point,” the company writes in its filing, “we would cease generating both Starbucks transaction revenue and Starbucks transaction costs, positively affecting our overall gross profit.” These are the kinds of fixes Square needs to make to shore up would-be shareholder confidence ahead of its IPO. But it’ll be seeking its caffeine fix elsewhere.

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Square’s New Tools Let You Sell Online, Not Just Off

Following a just-fine debut earnings report earlier this month, San Francisco-based electronics payments company Square—best known for its credit card reader for mobile phones—is releasing a new set of tools that let merchants sell online to complement the ways it lets them sell offline.

Square’s new E-commerce API will let sellers, whether they already use Square to take credit cards or not, process payments on their own websites. It’s reminiscent of a similar service from payments darling Stripe, but aimed more at small businesses than well-funded Silicon Valley startups. Square’s new API is designed to let merchants track online and offline sales in one place.

Another new tool, Square’s Register API, lets merchants customize any iOS point-of-sale app to suit their specific needs—something the company says should be especially useful for certain types of retail, like bike shops or wineries, which may have very specific requirements for their inventories.

Square says its ultimate goal is to eliminate the hassle sellers face of having to cobble together their systems from across a range of hardware, software, and payments processing options. From financing to payroll to payments to point-of-sale, Square is saying it wants to be a one-stop answer.

“What we hear from customers is that more and more of them want to be able to sell both offline and online, and they’re looking for solutions that will enable them to seamlessly do both, and have a consolidated view of their business,” says Alyssa Henry, who runs Square’s seller division.

Merchants, Henry says, should be able to pick and choose from a range of services depending on need, whether that’s online or offline, without having to sacrifice the ability to stretch into a new strategic direction. You can start as a seller with an offline store, then decide down the road to branch out online, or vice versa.

And that seems like a smart move at this point in Square’s life as a company. In the crowded field of payments, it’s tough to keep growing. And Square is under more pressure than ever to do just that as a public company. By offering a range of services beyond its core business of payments processing, the company is hoping to jumpstart the “virtuous cycle” of growth it described back when it went public last October. For shareholders, growth is among the greatest virtues of all.

Square Jumps in IPO After Pricing Shares Lower

Last night, the prospects for Square’s initial public offering looked shaky. After facing increasing investor skepticism, the electronics payment company priced shares for its IPO at $9—lower than the company’s initial proposed range of $11 to $13 a share. But as it turns out, the company’s lowball may not have been a bad move.

Square shares opened this morning at $11.05 and peaked in early trading at $14.78 per stock, which briefly put the company’s market cap at $4.77 billion. That’s still below the company’s highest private valuation of $6 billion but much higher than the company’s valuation of $2.9 billion at its initial asking price.

All of which signals at least some confidence in Square after much speculation that a poor showing in its IPO could lead to a broader loss of confidence in so-called unicorns—startups privately valued at more than $1 billion.

Still the gap between Square’s IPO price and market’s opening price today means the company sold more than 26 million shares to institutional investors at what amounts to a serious discount. The IPO pricing conundrum is especially familiar to tech companies subjecting not just a new company but often a new technology to the whims of the public market. Price an IPO too high or too low, and you’re leaving money on the table.

It’s easy to spout off about hitting that crucial sweet spot, but in an atmosphere where so much doubt is swirling doubt about Silicon Valley’s frothy venture capital environment, finding that spot takes some very careful aim.

Square Is Going Public At A Price Lower Than Planned

Facing yet more investor skepticism, electronic payments company Square reportedly priced shares for its upcoming public offering at $9—lower than the company’s proposed IPO range of $11 to $13 a share, and far below the $15.46 price Square had set for private investors during its fundraising round last year. That puts Square’s valuation at around $2.9 billion—dramatically lower the company’s earlier, much more optimistic private valuation of $6 billion.

Square’s IPO announcement comes at a time when the market has become increasingly wary of possibly overvalued tech startups, and some critics have clamored for Silicon Valley to be more realistic about how the companies it prizes will hold up under public scrutiny. Recently, mutual funds including Fidelity and Blackrock marked down the value of their stakes in several late-stage startups, including Snapchat and Dropbox. Square, a six-year-old payments company founded by Twitter CEO Jack Dorsey, has been held up as one of the more highly anticipated tech IPOs over the past few months. But this excitement apparently hasn’t extended to investors.

Because a provision in Square’s most recent private round of funding guaranteed later-stage investors a so-called ratchet, Square will issue those investors extra shares to make sure they receive a 20 percent return on their investment—further diluting the value of the company’s shares. Square will begin trading under the ticker symbol “SQ” on the New York Stock Exchange tomorrow morning.

Square’s Low IPO Price Could Signal Hard Times for Unicorns

Square hit Silicon Valley with a dose of reality this morning, when it announced plans to price its upcoming IPO at $11 to $13 a share. Even at the high end, that would give Square a valuation of around $4.2 billion, nearly $2 billion shy of its most recent private valuation of $6 billion.

For Square, it’s an attempt to err on the side of caution in an IPO market that hasn’t been particularly kind to tech companies this year. And yet, it also lends a certain credibility to critics of the frothy venture capital environment who say that so-called unicorns are fetching private valuations they could never justify on the public market.

But what may be most troubling to early investors in Square is a provision in Square’s most recent round of funding called a ratchet. It promises that even if the IPO is priced below the private valuation, Square will issue those investors additional shares in order to ensure they receive a 20 percent return on their investment.

It’s a practice that’s becoming increasingly common in late stage deals, giving influential investors additional protections post-IPO. As Buzzfeed points out, Box recently guaranteed ratchets to its biggest investors, as well. Already, cautionary tales about ratchet deals gone wrong are starting to emerge, with companies like Chegg becoming poster children for how these deals can screw over early investors.

The arrangement puts early stage investors and even early employees at a distinct disadvantage compared to late stage investors, who are guaranteed a payout no matter the outcome. Viewed that way, it’s hard not to see these deals as a product of an environment in which private companies are drastically overvalued. Even as they drive private company valuations higher and higher, these heavyweight investors are simultaneously hedging their bets, negotiating safety nets to protect themselves when a company’s public offering inevitably disappoints.

Dang, Jack, we are tired for you. At least some of Square’s employees seem to agree, given the wary line included in Square’s IPO filing with the U.S. Securities and Exchange Commission: “Jack Dorsey, our co-founder, President, and Chief Executive Officer, also serves as Chief Executive Officer of Twitter,” the filing reads. “This may at times adversely affect his ability to devote time, attention, and effort to Square.”

But Dorsey so far seems to have kept his head above water. He emphasized in Square’s filing that he’s fully committed to the company, even pouring 15 million shares, or 20 percent of his equity, back into Square, plus a possible extra 10 percent in the future. At Twitter, he’ll be getting some help now that the company has named a new executive chairman, ex-Googler Omid Kordestani. And, finally, Dorsey’s given up the beard. So you know the man is getting down to business.

Square Circles Up the IPO Wagons

It happened. Square has filed for its long-awaited IPO, and in doing so gave a small glimpse at the company’s path forward.

On Wednesday, the San Francisco-based electronic payments company made the announcement, via blog post, that it has filed the necessary public documents with the U.S. Securities and Exchange Commission, though the number of shares it will offer and the price range for the offering have not yet been determined. Square says it will list its common stock on the New York Stock Exchange under the symbol “SQ.”

The filing also gives the best look yet at Square’s financial situation, and its steady growth. For the first six months of 2015, the company says, its total revenue was up 51 percent, to $560.6 million, from the same period one year ago. It showed similar total net revenue in 2014, as well, taking in $850.2 million, up 54 percent from the previous year ($552 million). In 2012, the company’s net revenue was $203 million. In 2014, according to its filing, Square processed 446 million card payments from approximately 144 million payment cards.

The company’s still solidly in the red, but it narrowed its operating losses year over year, from $79.9 million in the first half of 2014 to $74.4 million in the first half of this year. Square also spent $450.8 million—more than half its revenue—on transaction costs in 2014.

And we now know a little more about how Square plans to evolve past its reliance on a plug-and-play card reader to succeed as a business moving forward. Square still generates 95 percent of its revenue from payments and point-of-sale services; financial and marketing arms, like Square Capital and Caviar, an on-demand food delivery service, make up the remainder. That balance may be about to change. “The collective power of our millions of sellers sustains a scale from which we can build valuable financial services and marketing services, creating reinforcing and virtuous cycles back to our core business of payments,” the company said, signaling an intent to leverage all that consumer data more than it has in the past.

Square’s public filing, notably, includes a note from Jack Dorsey, who recently committed to being the full-time CEO of both Square and Twitter. Dorsey wavered on committing to be Twitter’s CEO before he finally made it official last week and immediately started making changes to the company, including hundreds of layoffs. Now with Square filing for an IPO, Dorsey has the unenviable responsibility of being the CEO of two public companies.

But Dorsey says he’s fully committed to both companies, something he’s tried to make apparent with this Square filing. Dorsey says he’s given over 15 million shares, or 20 percent of his own equity, back to Square as well as the Start Small Foundation, an organization created to help small businesses. “I believe so much in the potential of this company to drive positive impact in my lifetime,” Dorsey wrote. Soon he’ll find out if the markets agree.

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